A Variation on Remaining Portfolio Withdrawals - GRPWM

[Midpack]

With several threads on 4% SWR inflation adjusted withdrawal lately, I thought I'd start one on another well known approach, with a twist.

I'm starting to like remaining portfolio vs inflation adjusted more and more because a) the odds of running out of money or leaving a huge residual are greatly reduced and b) adjustments for real return fluctuations are automatic by comparison. Problem with a static remaining portfolio % is while withdrawing 4% at age 55 may be appropriate, it's unnecessarily conservative as the years pass - presumably you could safely withdraw more than 4% at age 95.

So I guess I could just guess and tweak the percentages as the decades pass, but my engineer brain just isn't wired that way...

Where GRPWM = Graduated Remaining Portfolio Withdrawal Method. Yes I made it up the acronym, though I have to believe some scholar has written about something much like it. I'm borrowing the idea from the 1/N withdrawal method (actually more aggressive than GRPWM) and an old Stein-Demuth book (see book-chart inspiration below) that seems to be based on a Scott Burns lazy portfolio.

Method: So plan annual spending to fall (well) under the initial withdrawal rate (4-4.5%?), ignore returns, maybe reduce equity exposure with age, and withdraw from remaining portfolio as follows (for a strawperson):

Age|Withdrawal
50|5.5%
55|5.6%
60|5.9%
65|6.2%
70|6.6%
75|7.5%
80|8.9%
85|12.2%
90| " or use judgement!

 

[seabourne]

As someone looking at a potential 60 year or so retirement period, can we assume that the rates for 45+ are basically insensitive? i.e. ~5.5% for 95% for pretty much any retirement greater than 45 years.

 

[clifp]

I like the approach also, although it doesn't seem much different than just a slightly more aggressive variation of the method the IRS use to calculate RMD from an IRA or withdrawal from a IRA via 72(t) withdrawals.

I wish there was a way to model the spending in FIRECalc.

 

[Lagniappe]

This is essentially the withdrawal method I am planning to use, though my seat of the pants numbers were about 200 basis points lower than the numbers you show for 100% success. I was using a 2.5% withdrawal rate up to age 55, then increasing from there.

 

[samclem]

This is similar to Bengen's "SAFEMAX" aproach, but his suggested withdrawal rate is about 60% of what you came up with. Notice that he added 10 years to the unisex life expectancy (to be conservative). See this post for more info and links. Bengen did lots of backtesting, for an asset allocation starting with 40% Lrg caps, 20% Sm caps, 40% intermediate Gov bonds he gives the following:

Age…....A….…B…...C….…..D…..….E
50……....34….44..4.1%..5.1%..65%
55……....30….40….4.2…..5.3…..65%
60……....25……35….4.3….…5.4…….60%
65……....21….31….4.4…….5.5…..50%
70……....17….27….4.5…..5.6….…45%
75……....13….23….5.0…..6.3…..35%
80……...…10….20……5.2…..6.5…..30%
85……...….8……18……5.3…..6.6…..30%
90………....6……16……6.0…..7.5…..30%
95………....4……14….6.5…..8.1…..30%
100……....3….13……7.5…..9.4..…30%

A = Approximate unisex life expectancy (LE).

Note: I have updated column A according to tables in the current IRS tables in Pub 590.

B = Adjust LE by adding 10 years.

C = SWR% for the adjusted LE.

SWR%= safe withdrawal rate (SAFEMAX®).

D = Add 25% to C and get the RED FLAG%

E = equity suggested with three asset classes: LCS, SCS, and intermediate term Gov bonds, at the ratio of : SCS allocation = ½ LCS.

Note: I have added this column taken from Bill Bengen’s other reports.

Current Withdrawal Rate: end of year dollar withdrawal divided by beginning of year account value both in nominal terms. Don’t go over the RED FLAG.

 

[walkinwood]

At 52 (DW 49), I use the 4% of remaining portfolio & plan to increase that percentage over time. I like this more structured approach and need to read more about it. Midpack & Samclem -thanks for posting.

 

[Midpack]

As someone looking at a potential 60 year or so retirement period, can we assume that the rates for 45+ are basically insensitive? i.e. ~5.5% for 95% for pretty much any retirement greater than 45 years.

I wouldn't assume that, I'd expect it to be something slightly less than 5.5%.

 

[WilliamG]

This looks similar to recent article in Wallstreet Journal suggesting using the IRS table for inherited IRAs might utilize a withdrawal rate that is more realistic and allows using more money sooner. Quick check of that table is around 6% for age 70 and 7.5% for age 75.

Inherited IRA RMD Table - IRA Zone

 

[ejman]

With several threads on 4% SWR inflation adjusted withdrawal lately, I thought I'd start one on another well known approach, with a twist.

I'm starting to like remaining portfolio vs inflation adjusted more and more because a) the odds of running out of money or leaving a huge residual are greatly reduced and b) adjustments for real return fluctuations are automatic by comparison. Problem with a static remaining portfolio % is while withdrawing 4% at age 55 may be appropriate, it's unnecessarily conservative as the years pass - presumably you could safely withdraw more than 4% at age 95.

So I guess I could just guess and tweak the percentages as the decades pass, but my engineer brain just isn't wired that way...

Where GRPWM = Graduated Remaining Portfolio Withdrawal Method. Yes I made it up the acronym, though I have to believe some scholar has written about something much like it. I'm borrowing the idea from the 1/N withdrawal method (actually more aggressive than GRPWM) and an old Stein-Demuth book (see book-chart inspiration below) that seems to be based on a Scott Burns lazy portfolio.

Method: So plan annual spending to fall (well) under the initial withdrawal rate (4-4.5%?), ignore returns, maybe reduce equity exposure with age, and withdraw from remaining portfolio as follows (for a strawperson):

Age|Withdrawal
50|5.5%
55|5.6%
60|5.9%
65|6.2%
70|6.6%
75|7.5%
80|8.9%
85|12.2%
90| " or use judgement!

I was planning on using the standard IRA RMD tables combined with 4% of remaining balance from my taxable accounts. (about 40% of my liquid assets is taxable) Maybe the RMD ramps up too slowly? Age 85 withdrawals are less than half what you list above. IRA Distribution Tables - Bogleheads Of course, after death of spouse withdrawals ramp up rather rapidly for surviving spouse. In fact IRA ceases to exist at age 111.

 

[audreyh1]

I expect that once we reach (average age) 65 and again at 75, we'll be re-evaluating our withdrawal percentages.

 

[Animorph]

This is roughly my plan B sanity check. I used the life expectancy tables linked in another thread, calculated the 10% life expectancy (90% don't make it) for each year (and kept a minimum period of 10 years), and calculated a simple annuity balance/withdrawal that corresponded to a 4% withdrawal at 30 years. The end result was a "safe" withdrawal rate that increased every year. As long as we stay below that I'm comfortable.

However, this is a prescription for rising income as you age, if things go well with the portfolio. The usefulness of that is debatable. I'd be happy to know we could withdraw more, but I'm not sure we'd be likely to actually do it. A relatively constant spending level is my target, and a declining spending level seems quite possible even if the portfolio is doing well. This withdrawal method doesn't do anything to help push up early retirement spending.

At the start of retirement you just need a lot of margin. Farther into it you'll begin to know if it was too much or too little. At the end you'll have a precise answer.

 

[enjoyinglife102]

I'm also a fan of remaining portfolio percentage with a big part of that staying on top of my essential expenses so I know how much "play" money I have to work with and can be flexible with how I spend it.

 

[audreyh1]

Just want to point out that if you have increasing income as you age - you might not "be able" to spend it on yourself, but you can spend it on others .

I'm of the camp that spending now (prudently) is better than spending later, but I'm certainly not worried about being able to spend it.

 

[Running_Man]

Is there a source or should I play with the numbers myself to see how income fluctuates with this based on various portfolios? 8.9% at age 80 seems like an awful lot if a bear market were to hit, it would seem to risk a dramatic drop in income in the 80's?

 

[W2R]

Is there a source or should I play with the numbers myself to see how income fluctuates with this based on various portfolios? 8.9% at age 80 seems like an awful lot if a bear market were to hit, it would seem to risk a dramatic drop in income in the 80's?

Right - - might not work out so well if one lived another 20-25 years, as some do.

 

[smjsl]

newbie question: what defines the "floor" / "success" in these methods? I.e. how do you know if it's likely (and how likely?) to produce "too low" of an outcome?

In other words, since we know that withdrawing 99% of remaining portfolio every year will never run out of money (except quickly becoming "too low"), there must be some limit as to identifying when these WRs "fail" vs "succeed"... I see attached picture in the OP shows percentages of "success" / safe outcomes - so just curious about its definition of success.

 

[David1961]

Interesting subject. I think this method has more flexibility than the standard 4% rule. The only issue I see is that if your portfolio goes down significantly in a short period of time, you have to be able to significantly reduce your spending the next year(s) until your portfolio has recovered. Thanks for posting.

 

[David1961]

Midpack, can I ask what Stein-Demuth book you got the chart "Figure 8.1" in the original post from? Would be interesting reading. Seems like there would have to be some asset allocation associated with these numbers. Wouldn't different AAs yield different withdrawal rates?

 

[samclem]

The only issue I see is that if your portfolio goes down significantly in a short period of time, you have to be able to significantly reduce your spending the next year(s) until your portfolio has recovered.

I think that's what most people would do anyway, so factoring it in is worthwhile. It would be hard to enjoy that expensive vacation or to buy that new car when the portfolio is down far more than you'd projected.

I've often thought that those lines Firecalc produces for each set of modeled years do a poor job of capturing the emotions we'd feel while riding those lines. Some go down and eventually go back up, but when you are actually riding that line the "eventually go back up" part would not be so obvious. So, we'd forgo the vacation and the new car.

 

[audreyh1]

Interesting subject. I think this method has more flexibility than the standard 4% rule. The only issue I see is that if your portfolio goes down significantly in a short period of time, you have to be able to significantly reduce your spending the next year(s) until your portfolio has recovered. Thanks for posting.

This can be planned for, ahead of time, by simply setting aside some of your annual withdrawal in savings to be used as a cushion for lean years. That can reduce the anxiety of the event when it inevitably occurs. You'll probably ratchet down your spending anyway, but having a little set aside for a rainy day sure helps.

 

[jebmke]

I've often thought that those lines Firecalc produces for each set of modeled years do a poor job of capturing the emotions we'd feel while riding those lines. Some go down and eventually go back up, but when you are actually riding that line the "eventually go back up" part would not be so obvious. So, we'd forgo the vacation and the new car.

The key for us was to keep our equity level fairly conservative and a slush fund set aside that we don't "count". Often recessions give you the best value things like travel costs and home improvement.